Sunday, August 19, 2018

Calculating Inflation with a Practical Example

Everyone needs to know how to calculate inflation.  Here is how, with a practical example.  I have an old copy of Glory Road by Robert Heinlein from 1963 priced at $1.75.  Wow!  Today that book sells for $16.99.  To calculate the inflation that drives a book from $1.75 to $17 dollars we set up this equation after calculating (2018 - 1963) = 55:
1.75 ( 1 + x)**55 = 17.0
To solve with python, you first do "import math" into the IDLE GUI.

>>> import math
Here is the solution to the equation.  We all remember algebra, right?
>>> 10.0 ** ( math.log10(17.0 / 1.75) / 55.0)
1.0422044542587574
So 1.0422 is 1 + x, meaning the inflation rate for this book is 4.22% over 55 years.
The average inflation rate is presumed to be 3% as I stated in "Teaching Our Children About Investments" (July 29, 2018), but it is 4% for this book.

Going from $1.75 to $17 is about a 10 fold increase.  I saw this in my lifetime.  I was buying stuff in 1963.  You have to tell your kids that everything they buy today will cost at least ten times more when they are older.  You have to tell them that inflation is a threat to them and their future.  Think about it.  If you have a big basket of groceries and you pay $200.00, like I have done, that same basket of groceries will cost your children $2,000.00 in their lifetime.  It might be 50 years later, but  it is coming like the sunrise if we cannot cannot drop inflation back to about one percent.

Inflation is a hidden tax imposed on us by our own government.  Milton Friedman said in "Money Mischief: Episodes in Monetary History," that, “Inflation is always and everywhere a monetary phenomenon.”  That is a fancy way of saying the government does it to us because it sets monetary policy and controls the money supply.

We all should be getting after our elected officials about inflation and deficit spending.  The mass media, like television news, distracts us away from what is important to us with what I would call "circus sideshows."  They have been running an anti-Trump circus sideshow for about two years now.  They have lost their minds.  Our TV news media are much like Emperor Nero fiddling while Rome burned.

We need to stay focused on what is important to our families and our future.  Inflation is one of the important items we do not talk enough about.
Look at the huge difference between 4% and 2% inflation over our adult life time, which I will call 60 years, which is age 25 to age 85.  (Cut and paste the following from Python IDLE GUI)
>>> 1.04 ** 60
10.519627408052855
>>> 1.02 ** 60
3.2810307883654146
Prices going up by a factor of 10 is nuts, but it is what we have at 4% inflation.  Going up by a factor of 3 is more manageable, which is with a 2% inflation rate.  I think I will write my congressman!

Robert

Tuesday, August 7, 2018

Life is Not Fair, Part 2 - Salesmen Get Swindled

How Salesmen Get Swindled

Selling is a talent; selling is a skill.  Selling is vital to companies because not every product sells itself.  Some people might think that the sales profession is inherently dishonest, which is untrue.  Sales is a hard job and a difficult job, but there is nothing inherently dishonest about it.  What people might not realize is that salesmen are frequently swindled by their management.

Territory Reduction

One of the ways a salesperson gets swindled is by having the sales territory reduced.  If a salesman makes more money than his manager, the manager can get jealous and take business away from a successful salesman in order to cut his pay.  Consider the unfairness of this action.  As a salesman you develop a territory and cultivate regular customers.  Then the fruits of your labor are taken away and given to someone else.  One of my neighbors once told me this happened to him.  This is pretty common.

Ewing Marion Kauffman was one of the wealthiest men in Missouri.  He started Marion Laboratories, a pharmaceutical company.  Marion Labs merged with Merrell Dow in 1989, which was then bought out by Marion Roussel Hoechst for $7.1 billion in 1995.

The reason Ewing Kauffman started his business was that he was a successful salesman with a pharmaceutical company, but got swindled.  His company cut his sales territory because Kauffman was so successful that he was making more money than the president of the company. He decided not to look for another job. Instead, he made his own mark on the pharmaceutical industry by starting his own company and doing things his way.

In the book Father, Son & Co.by Thomas J. Watson, Jr., Watson Junior describes how he started his career at IBM by becoming salesman of the year.  His father, Watson Senior, who ran the company, knew of a salesman who had scored a big sale.  The father took the sales territory away from the salesman who worked that territory and gave the territory to his son.  So Watson Junior became salesman of the year without lifting a finger.  Indeed, life is not fair.

Commission Reduction

I remember a story about Circuit City, the bankrupt and defunct consumer electronics store.  At one store a salesman called in for a special meeting before the store opened could see all the top salesmen were called in for the same meeting.  He thought they were going to get some special reward.  The reward they got for their hard was to get fired.  The company decided to cut their commissions, thought the best salesmen would be unhappy about reduced commissions, so Circuit City fired them -- their best salesmen.  The expression, "cut your nose off to spite your face," comes to mind.  Greed and stupidity are boundless.  This story was printed many years ago in the Wall Street Journal.

One former salesman told me directly that after a banner year of sales where he hit all his targets he expected a huge bonus and instead was fired because the owner of the company could not bare to part with the bonus he had promised the salesman.  That is a commission reduction down to zero!

It is incredible to imagine that a salesman would be punished for being a good salesman, but that is greed at work -- the greed of a business owner or a sales manager. 

If your child goes into sales, your child must understand that salesmen do get cheated.  I have only scratched the surface of the unfairness salespeople face.

Robert

PS:  Everyone should know that Ewing Kauffman started the Ewing Marion Kauffman Foundation to promote entrepreneurship.  Also, the book Father, Son & Co. is an excellent book.  I recommend it.